Michael Low, counsel at Kutak Rock, summarises the requirements of Arizona captive law and highlights some of the unique features of the law that has brought major captive business to the Grand Canyon State
Michael Low, counsel at Kutak Rock, summarises the requirements of Arizona captive law and highlights some of the unique features of the law that has brought major captive business to the Grand Canyon State
24 US states have adopted captive insurance programmes providing alternative risk mechanisms to attract American businesses. Arizona enacted its captive statutory scheme in 2001 and the Arizona Department of Insurance (ADOI) has since licensed 117 captive insurers through its captive insurance division, including subsidiaries of manufacturers, health care companies, finance and insurance groups, construction companies and other business entities.
This article will provide an overview of the requirements of the Arizona captive law and discuss some of the unique features of that law that has attracted major business enterprises to form captive insurers in the state.
Arizona permits the licensing of six different types of captive insurers, pure captives, association or industry group captives, risk retention groups, agency captives, protected cell captives, and pure reinsurance captives.
The captive insurance division is a separate unit within the Financial Affairs Division of the ADOI. The assistant director of the ADOI, Financial Division, is Kurt Regner.
The captive insurance division, which reports to Regner, is headed up by Vince Gosz, chief analyst, and includes Rae Hughes, captive analyst, and Maidene Scheiner, administrative assistant.
A captive insurance fund is established to fund the administration of the captive programme and consists of monies deposited relating to the fees paid for the issuance of a captive insurance license and upon the annual renewal of same.
Application process
The ADOI requires a pre-application submission, including a business plan, a proposed governance structure, the name of the actuary who will be performing the feasibility study and a list of the proposed service providers, including the captive manager. The department may request an in-person meeting following the review of the pre-application materials; however, a face-to-face meeting is generally recommended.
When the application is submitted, it must include an initial license fee of $1,000, an examiner’s revolving fund deposit of $100, a charter document filing fee of $75 and articles of incorporation with a filing fee of $60 payable to the Arizona Corporation Commission. The application also must include original biographical affidavits for all officers and directors.
Fingerprinting is not required. Bylaws, consistent with both Arizona General Corporate Law and the Captive Statutes, should also be filed and should include at least one board of directors meeting in Arizona annually, as well as the identification of a principal place of business in Arizona. The latter can be the office of the captive manager, the attorney or the statutory agent.
A warm environment for captives
Unlike most captive jurisdictions, no premium tax is required to be paid by a captive insurer. After licensing, the only fee charged is an annual renewal fee for $5,500 payable to the ADOI. Small-company exemption from annual actuarial opinion and audit requirements are available. Essentially, captives with less than $1 million in direct or assumed premium and $1 million in loss reserves and loss expenses are exempt from providing annual actuarial opinions and independent financial audits. There is no regularly scheduled statutory examination for pure captives. While the director reserves the right to conduct an examination at any time, from a practical standpoint, such examinations are rare and only triggered under extraordinary circumstances.
Arizona has a strong confidentiality law that protects all information filed with or made available to ADOI. By statute, the Arizona director can only identify the name of the captive insurer, the date of its licensing, the type of captive insurer, including the business or industry of the owners or member and the captive’s licensed status. Information may be discoverable by a party in a civil action in which the captive insurer has previously submitted information to such party and the director is required to provide information other governmental agencies in connection with any civil or criminal investigation as may be required by a subpoena issued by such agency.
Approval of the application for a captive license should take place within thirty days after submission of an application deemed complete. The average time for license review and approval is generally 25 to 30 days.
Steady growth
The Arizona captive programme has been in existence for over sixteen years. At the time of writing, there are 117 licensed Arizona captive insurers, ranging from some of the largest and most technically complex financial entities in the US to smaller niche entities that qualify for the small company exemptions. As a mature captive programme, Arizona is ranked as the 10th largest captive jurisdiction in the US. Over the years, the programme has seen a steady and consistent growth in the number of captives due to both the provisions of the captive law and the support of the ADOI. The expectation is that that trend will continue.
